Alongside its consultation on reform of the Landlord and Tenant Act 1954 (see our earlier article here on the second consultation paper), the Law Commission has recently launched a consultation on overcoming barriers to commercial leasehold transactions (Consultation). The Consultation focuses on two specific pieces of legislation: the right of first refusal under the Landlord and Tenant Act 1987 and anti‑avoidance provisions in the Landlord and Tenant (Covenants) Act 1995 (1995 Act).
The central legal issue arising from the proposals contained within the Consultation is whether particular aspects of either of these regimes are operating as intended in a commercial leasehold context or generating unintended consequences, uncertainty, delay, and cost in routine transactions.
The Law Commission is therefore seeking views and evidence from consultees on the impacts of its proposals and consequences of potential reforms.
Landlord and Tenant Act 1987 - Right of first refusal
Under the current law, where a landlord intends to dispose of its interest in a qualifying building containing residential flats (for example, by granting a lease of part), it may first be required to offer that interest to qualifying residential leaseholders. When triggered, this requirement involves a detailed and complicated procedure. A failure to comply with the requirements is serious and may give rise to criminal liability.
Whilst the legislation's principal aim was to protect the rights of residential leaseholders, the Law Commission has identified that this regime may be operating inappropriately in mixed-use developments. Where landlords are granting leases of commercial parts (such as retail or office units) in an affected mixed-use building, this potentially triggers the requirement to offer the residential leaseholders the right of first refusal. This inevitably increases the expense and risks in otherwise straightforward transactions. The Law Commission considers that it is unlikely that Parliament intended the right of first refusal to apply to the grant of a commercial lease.
The Consultation therefore seeks views on whether the grant of a commercial lease of part, in a mixed-use building, should trigger the right of first refusal at all.
Landlord and Tenant (Covenants) Act 1995 - Anti-avoidance provisions
The 1995 Act governs the position when a tenant assigns a lease entered into post 1995. In these circumstances, the 1995 Act provides for the automatic release of the outgoing tenant from liability for the obligations it owed to the landlord under the lease and, where an outgoing tenant is released, that any guarantor is released to the same extent.
While introduced to address unfair ongoing liability for outgoing tenants, the 1995 Act includes widely drafted anti‑avoidance provisions that restrict certain arrangements which frustrate the operation of the 1995 Act. The corollary of the anti-avoidance provision and its interaction with the other elements of the 1995 Act has resulted in what some see as an obstacle to commercially sensible arrangements, particularly where assignments and guarantees involve connected parties (for example, restrictions on repeat guarantees, intra-group assignments or arrangements where a guarantor provides a guarantee for a connected assignee).
This can require parties to adopt more complex or artificial structures to achieve commercially straightforward outcomes.
The Consultation therefore considers whether the 1995 Act should be reformed to allow flexibility in specific circumstances, facilitating transactions involving connected parties, while still preserving the 1995 Act's objectives to protect former tenants and guarantors from ongoing liabilities post-assignment.
The Consultation closes on 16 September 2026 and presents an important opportunity for landlords, investors, developers, and occupiers operating in the commercial leasehold sphere to help ensure that future reforms reflect commercial realities to avoid delay and cost, and strike the right balance between flexibility and protection.
